Breaching employment contracts just got riskier, following High Court decision

Employers should be cautious about incorporating processes, procedures, Awards, Enterprise Agreements, or similar documents dealing with discipline and termination into employment contracts. The High Court has now held employers can be liable for psychiatric injury caused by breaches of the employment contract during a disciplinary proceeding that culminated in termination (Elisha v Vision Australia Limited [2024] HCA 50).

The more serious the breach of contract by the employer, the more likely an employee will be successful in suing for damages for psychiatric injury.

Incorporating processes, policies and procedures into employment contracts

Since 2016, it’s been clear from Federal Court decisions that external documents that cover disciplinary procedures can be incorporated into employment contracts. The High Court has endorsed this, saying:

“the existence of clear language with sufficient emphasis upon the need for compliance with the terms of a company policy indicates an intention that such terms will be contractually binding.”

Psychiatric injury and the breach of an employment contract

The longstanding view has been that psychiatric injury caused by the breach of an employment contract cannot be compensated (Addis v Gramophone Company Ltd [1909] AC 488). The High Court has decisively moved away from that longstanding view.

The Court noted that for over 30 years, psychiatric injury caused by a breach of contract could be compensated, and there was no carve-out for particular classes of contracts, including employment contracts. It also pointed out that Addis, decided in 1909, held mental distress was not compensable. Times have changed, and there is a more sophisticated understanding of the difference between mental distress and actual psychiatric illness.

When psychiatric injury caused by a breach of contract is not too remote

The hardest issue is making a connection between the contract terms at the time the contract was executed and the psychiatric injury caused by the breach. The lawyer’s shorthand for this is “remoteness”.

The traditional approach adopted by the courts to determine if damage caused by a breach of contract is compensable is to ask two questions (see Hadley v Baxendale). The High Court described the task as follows:

“The starting point in applying the test for remoteness of damage is to identify the circumstances of the breach. Given those circumstances, the test of remoteness considers the general type of damage that occurred and the general manner in which the damage occurred. That general type of damage and general manner of occurrence must have been within the reasonable contemplation of the parties, at the time of contract, as a serious possibility…

the precise damage and the precise manner of occurrence of the damage need not be contemplated. However, the more particular the description of the type of damage and the manner of its occurrence, the more likely it will be that the damage arising from the breach will be found to be too remote, so that the plaintiff will be required to bear that loss.”

Using that approach, it found that, at least in this case, psychiatric damage could be said to have arisen according to the usual course of things, and it could reasonably be said to be within contemplation of both parties when they made the contract that it could be a probable result of the breach, and indeed a "serious possibility". The employer in this case had created psychiatric support for employees undergoing disciplinary proceedings, so it understood the risk. The Court itself noted the devastating impact the loss of a job could have on an employee:

“It has been described as a ‘social reality’ that a person's employment ‘is usually one of the most important things in his or her life. It gives not only a livelihood but an occupation, an identity and a sense of self-esteem.’ An unfair process of termination for alleged misconduct could affect all three of those interests; ie, a person's livelihood, identity, and self-esteem.”

A general duty of care?

Mr Elisha also argued his employer owed him a duty of care to provide a safe system of investigation and decision-making with respect to discipline and termination of employment. Given its other rulings, the High Court did not decide on this, although it expressed caution about recognising one.

The main problem it identified was that of coherence: if this duty existed, how would it work with other, possibly conflicting, legal rights and obligations? There is already a body of law – including Federal and State workplace health and safety laws, and administrative law – that could also apply to investigations, discipline and termination. The employer also has a right to discipline and terminate an employee. Adding a duty of care in the proposed terms could conflict with some or all of these. Without proper arguments exploring these questions, the High Court simply declined to consider it.